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Federico Flom
Federico Flom
Articles (110) 

Royal Caribbean Cruise Ltd. (RCL) Is a Great Company at Attractive Valuations

November 22, 2011 | About:

Royal Caribbean (NYSE:RCL) is considered the second-largestcruise company across the world. It includes different branches, to wit: Royal Caribbean International, Celebrity Cruises and Azamara.

It also operates the Pullmantur brand in Spain, Portugal and Latin America; the CDF Croisières de France brand in the French market; and it has conquered the German market through TUI Cruises.

With 40 ships and space for nearly 92,000 passengers, this Miami, Fla.-based company has been able to reach a wide group of consumers. Generally speaking, it has always received awards and press reviews that have always recognized the service it renders.

There are some specific pros to mention about Royal Caribbean that are a key factor in driving higher revenues:

  • It represents the highest satisfaction rates in terms of holidays.

  • It usually has repeated clients.

  • It is doing its best to attract baby-boomers that will soon long for this type of vacation.

  • Guest satisfaction levels are at historical highs.

  • The excess demand will allow the company to apply better pricing strategies.

  • It has been investing large amounts to develop new ships with innovative design as well as to upgrade existing vessels.

  • It only has one competitor: Carnival Cruise Lines. It is quite difficult for a new competitor to enter the market.
But that is not all. Although the U.S. represents its core target market, Royal Caribbean is working to have access to the land of opportunities, China, in 2012. It is considered a significant long-term chance. And for such purpose, RCL has doubled its capacity in such a market place; it has tested the market and has been able to set a local management and representation. This will imply a fast-growing and a diversified pool of customers.

Furthermore, it has made its greatest efforts to build relationships with the government.

The company believes that the Chinese middle class is significantly growing and this situation will remain as such for the long term.

But describing the company and mentioning its future plans is not enough for me. So, let's look at the valuation aspect.

As regards shares, they have been traded at $33. This is good, especially because their price has increased from the previous $26. And this has been related to an improved free cash flow outlook that resulted from a reduction in the debt burden and a slowdown in capital expenditures.

The forward multiples for RCL in 2012 are quite attractive: a P/E ratio of 10.3 times; an enterprise value/EBITDA of 8.9 times and a 7.6% yield in cash flow. Moreover, pricing is expected to grow mid single digits thanks to a stabilization of costs.

Also, RCL is trading below its historical multiple averages.

For example, it is trading in the low-end band of its P/B, P/S and P/E historical multiples. That represents an historical opportunity to buy RCL before the market negativity ends and start the accumulation that this kind of sector deserves.



It is interesting that 2011 will see an expansion in operating margins and more efficient fuel consumption.

Least but not last, I must not forget about management. A company is worth investing if it has a strong management that supports it. What happens in this case?

Richard Fain has been RCL chairman and CEO since 1988. The team has a wide experience, after being in office for nearly 17 years. Nevertheless, I think that the roles of chairman and CEO will be better served if they were divided. They would encourage more independence in the BOD; which is actually divided into three.

Despite a few cons, I think that management incentives are aligned. They receive a base salary, annual incentives based on performance and awards.

I like Royal Caribbean very much. With the variety of services, qualified ships and best price guarantee, the company provides the best vacation at sea.

There is no doubt, it is a good match with a great growth potential that is not much appreciated in the market.

About the author:

Federico Flom
Equity Research Analyst

Rating: 3.0/5 (11 votes)


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